LTHM - Livent: Undervalued With Significant Upside Potential

2023-12-19 02:57:49 ET

Summary

• The strong share price decline is a result of the macro headwinds in the lithium sector. 50% decline over the past 12 months.
• Despite these challenges, Livent's fundamental outlook remains strong, with anticipated growth in the lithium sector and a merger with Allkem as additional growth catalysts.
• Technical analysis shows a bottom around $13-$14.
• Strong undervaluation based on EV/EBITDA.
• A bottom share price combined with a significant undervaluation based on the EBITDA presents a buying opportunity.

Investment Thesis

Livent (LTHM), as of last week, has witnessed a substantial 31% year-over-year decline in its share price and a remarkable 50% drop over the past twelve months, positioning Livent as one of the most undervalued lithium players, in my opinion. Recent macro challenges, including a significant decrease in lithium prices, weak electric vehicle demand, and rising interest rates, have all contributed to Livent's share price decline. Despite these challenges, the company maintains strong growth prospects and a positive long-term outlook in the lithium sector. Considering these factors, I believe today presents an opportunity to invest in one of the top lithium miners at a discounted price.

Weakness In The Stock Price Due To Macro Factors

The most noteworthy of Livent currently is its stock performance. As of last week, we saw a year-to-date decline of 31% and a staggering 50% drop over the past twelve months.

A strong downtrend has been in play since August this year. The factors behind this are primarily macroeconomic. These include the sharp decline in lithium prices, weakening demand for electric vehicles, and higher interest rates. These factors led to a declining share price for Livent but didn't change the company's fundamental outlook. In a previous article, I discussed Livent's long-term potential and the significant growth anticipated in the coming years. Little has changed in that thesis except for the upcoming merger with Allkem, which acts as an extra growth catalyst.

1) Lithium Price

Lithium prices have sharply declined since reaching all-time highs in November 2022. The shift from a supply shortage with high demand to an oversupply with weakened demand has led to a strong decline in the price of lithium carbonate. Additionally, analysts expect a further drop in prices next year. Goldman Sachs expects that there will be declining prices in 2024 due to oversupply. Even though the short-term prices may be declining, the long-term price of Lithium will be trending upwards due to the green energy transition, more EV demand, and overall supply shortages of lithium.

While these price fluctuations are cyclical and impact in the short term, it's essential to note that lithium miners have long-term contracts in place to mitigate these fluctuations. Livent's financial results reflect this resilience, with revenue figures continuing on an upward trajectory despite an 81% year-to-date decline in the price of lithium carbonate.

It's also quite evident how lithium miners are affected by the volatility in lithium prices. The chart below illustrates the lithium carbonate price during the period from early 2021 to the end of 2022, marked by a significant supply shortage in the lithium market.

Comparing the price of lithium with Livent's stock performance during the period of a strong lithium price increase from early 2021 to the end of 2022 illustrates the correlation between the two.

2) Weakening Demand For EVs

While short-term macroeconomic factors have temporarily slowed down the growth of the electric vehicle market, future demand for electric vehicles remains strong.

These strong growth expectations are also what Livent is focusing on, anticipating future increases in cash inflows.

3) Interest Rates

This factor is pretty straightforward in the current period, so I will delve only a little into it. Rising interest rates have led to decreased demand across the lithium industry, resulting in price declines and declining stock prices. Anticipated decreasing interest rates in 2024 could act as a catalyst for increased demand, potentially leading to higher prices in the future. While I don't expect price spikes like those in 2021-2022, I do anticipate a significant upward trend in the average price of lithium in the coming years.

Company Fundamentals Remain Strong Despite These Macro Headwinds

Despite these challenges and a significant decline in the lithium price, the growth for 2023 compared to 2022 is estimated to be a 13% increase. Rising interest rates, falling lithium prices, and weakening demand for EVs posed a significant short-term setback for Livent. However, this challenge has been successfully managed through fixed-price contracts . Despite the falling price and decreasing demand, Livent could still sell at higher prices , resulting in higher margins and sustained growth. Important to note is that these fixed-price contracts help to overcome temporary challenging periods. Currently, those fixed-price contracts have already expired. Nevertheless, CEO Paul Graves expects the price for battery materials to rise again as demand is set to increase significantly in the coming years. Making those fixed-price contracts a helpful tool in periods of declining prices to keep margins higher.

The Q2 2023 results further support Livent's ability to navigate challenges, with incoming cash from operational activities three times higher compared to the same period in 2022.

Despite the declining lithium prices and overall weakening sentiment in the lithium sector, Livent's strong cash position indicates a robust financial position. Livent can withstand challenges and maintain a solid financial position, presenting a significant buying opportunity in a sector where market sentiment has plummeted. That is exactly the perfect combination present in Livent Corp today – a strong company, a powerful macro thesis regarding the future of lithium prices, and a significant undervaluation, making Livent a convincing buying opportunity to ride the long-term growth wave in the lithium sector.

Strong Growth Prospects Remain

In my previous article, I extensively covered Livent's growth expectations. An important aspect that has further increased the growth potential is the merger with Allkem. When I wrote my previous article, this had yet to be announced, which is why I now have even greater growth expectations.

The $10.6 billion deal would create the third-largest lithium producer globally. This deal is also growth-accelerating, potentially elevating growth expectations even higher. The sentiment "Bigger is Better" was emphasized by CEO Paul Graves in the Bloomberg TV interview . Mr. Graves hints at additional growth post-merger, emphasizing increased production capacity, cost efficiency, accelerated growth, and a focus on ESG. One immediate standout feature of this merger is the increased production capacity. The NewCo would bring production to 248 ktpa lithium , just below the levels of SQM and Albemarle. Of course, this is a future forecast and isn't a guarantee.

In addition to strong internal growth, there's also the long-term lithium narrative. As discussed above, the future demand for EVs is expected to increase significantly, and the same holds for lithium. It's not just the demand for electric vehicles; the practical aspects of lithium mining also contribute to supply challenges . Issues such as mining permits, supply chain problems, long waiting times before mines become operational, and ESG concerns in mining all put pressure on the supply, logically leading to an increase in prices in the coming years.

Valuation

Examining Livent's valuation relative to the sector reveals that Livent is currently more undervalued compared to the sector average, trading at just above 6 times the enterprise value-to-EBITDA (EV/EBITDA) ratio.

Buying now offers a substantial discount if investors are only willing to pay 6-7 times the EBITDA for a company with strong operational activities and attractive growth prospects. Over the past five years, the lowest valuation was on June 1, 2019, at 5.9 times the EV/EBITDA. The chart below depicts the growth of EBITDA over the past 7 years. As you can see, there was a significant increase in EBITDA in the past year. Full Year 2022 EBITDA reached $365.5 million. Currently, the EBITDA is already at $473.8 million ((TTM)). The fact that the valuation is just above 6 times these EBITDA figures represents a ridiculous undervaluation.

As discussed earlier, the production expectation for the NewCo is estimated at 248 ktpa. In this valuation, you can acquire the third-largest lithium producer at just under 7 times the EBITDA. Comparing this valuation with the top two leaders, Albemarle is listed at just under 7 times the EBITDA, and SQM at 3 times. The bottom line is that, given the growth expectations, the merger, and the long-term future in the lithium market, this presents a tremendous buying opportunity.

Technical Analysis

On the chart, a clear reversal is visible in the trend. I have been analyzing the trend around the $13-$14 level from November till the first week of December and observed that a strong support level has now been established at these levels.

We can now see a clear reversal in the trend:

Of course, there's no guarantee that this uptrend will continue. It could also be a short-lived end-of-the-year rally. Despite this, it still looks like a good entry point considering the long-term potential.

Additionally, a consolidation pattern is noticeable along the 50-day Simple Moving Average ((SMA)). This is a strong indication that the bottom may have been reached, and we could potentially see a reversal in the trend from this point.

Furthermore, on a technical level, there is a clear rounding bottom pattern. This pattern serves as a distinct indication of when the bottom has been reached.

While this technical analysis provides a fairly strong confirmation of a potential bottom, I prefer to wait for a possible double-bottom pattern to further strengthen this thesis. Nevertheless, the current price level around $13-$14 still presents an attractive entry point.

Key Takeaways

Livent Corporation faced a significant year-over-year stock decline of 31% and an impressive 50% drop over the past twelve months. Despite the strong share price decline, Livent is currently positioned as one of the most undervalued stocks in the lithium sector. The macro headwinds, influenced by a decline in lithium prices, weakened electric vehicle demand, and rising interest rates have led to a rock-bottom share price. However, on a company level, the financials and growth prospects are stronger than ever. Technical analysis reveals a clear reversal in the stock's trend, with a support level established around the $13-$14 range. Combined with a rounding bottom pattern, this reinforces the indication that the share price may have found a bottom. The strong growth prospects, the merger with Allkem, and strong financial results during these challenging times combined with a strong undervaluation make this one of the most interesting long-term lithium stocks with limited downside and a lot of upside potential.

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